What is an Actuarial Valuation?

As Saudi Arabia accelerates toward Vision 2030, the Kingdom’s financial reporting landscape has become world-class. For CFOs and HR Directors operating in KSA, the term "actuarial valuation" is no longer optional—it is a cornerstone of regulatory compliance.

Whether you are a local entity or a multinational with operations in Riyadh, Jeddah, or NEOM, understanding how actuarial valuations impact your balance sheet is essential.

Defining Actuarial Valuation in the KSA Context

An actuarial valuation is a specialized financial assessment used to estimate the current value of future liabilities. While it is used globally for pensions and insurance, in Saudi Arabia, its primary application is the End-of-Service Benefit (EOSB).

According to Saudi Labor Law, every employer is obligated to pay a lump sum to employees upon the termination of their contract. Because these payments happen in the future and depend on variables like salary increases and years of service, they cannot be accounted for using simple bookkeeping. You need an actuary to determine your Defined Benefit Obligation (DBO).

Why is it Mandatory for Saudi Companies?

1. Compliance with IFRS and SOCPA

The Saudi Organization for Chartered and Professional Accountants (SOCPA) has mandated the use of International Financial Reporting Standards (IFRS) for all listed companies and many private entities. Under IAS 19 (Employee Benefits), companies are strictly prohibited from using the "terminal payout method" (calculating only what you would pay if everyone quit today). Instead, you must use an actuarial model known as the Projected Unit Credit Method.

2. Alignment with Saudi Labor Law (Articles 84-88)

The Saudi Labor Law specifies exactly how many days of "last wage" an employee is entitled to based on their tenure (15 days for the first 5 years, and a full month for each year thereafter). An actuarial valuation takes these legal requirements and overlays them with "probability" to show the true cost of your workforce over time.

3. Zakat and Tax Implications

For the Zakat, Tax and Customs Authority (ZATCA), having an accurate, actuary-signed valuation ensures that your provisions for employee benefits are transparent. This prevents disputes during audits regarding the inflation of expenses or the underfunding of liabilities.

Key Assumptions: The "Saudi Factors"

Actuaries don't just use global averages; they must tailor their valuation to the Saudi Arabian economic environment:

The Discount Rate: Usually derived from yields on high-quality corporate or government bonds (often referenced against Saudi Sovereign Bond yields) to determine the present value of the debt.

Salary Increase Rate: Given the competitive nature of the Saudi labor market under Vision 2030, actuaries must project realistic salary growth to avoid underfunding the EOSB.

Turnover and Retirement: The actuary analyzes your company’s historical data to see how long "Expat" vs. "Saudi National" employees typically stay, as this significantly changes the liability.

Mortality and Disability: While GOSI covers many of these aspects, the employer’s residual liability must still be calculated.

The Valuation Process: From Data to Audit

If your company is approaching its year-end audit, the actuarial process follows these steps:

Data Extraction: You provide a census of your workforce (Join date, basic salary, allowances, nationality, and GOSI details).

Assumption Setting: The actuary works with your Finance team to set the "financial assumptions" (inflation, discount rates) and "demographic assumptions" (attrition).

Modeling: The actuary runs thousands of simulations to calculate the "Service Cost" (the cost of the benefit earned by employees this year).

The IAS 19 Report: You receive a comprehensive report that includes the Sensitivity Analysis—a requirement for KSA auditors that shows how your liability would change if interest rates or salaries shifted by 1%.

Frequently Asked Questions in KSA

"Can we just use our GOSI contributions as our valuation?" No. GOSI is a social insurance contribution. The End-of-Service Benefit (EOSB) is a separate legal obligation of the employer under Saudi Labor Law. You must account for the EOSB separately on your financial statements.

"Do SMEs in Saudi Arabia need this?" If your company is required to produce audited financial statements under IFRS, the answer is yes. Even for smaller firms, an actuarial valuation provides a more accurate picture of the company’s "sale value" or "exit value."

Conclusion: Preparing for a Transparent Future

In Saudi Arabia, an actuarial valuation is more than a "tick-box" exercise for auditors. It is a strategic tool that ensures your business remains solvent and compliant with the Kingdom’s rapidly evolving financial regulations.

As ZATCA and SOCPA continue to tighten reporting standards, having a certified actuarial report is the best way to protect your board of directors and ensure the long-term sustainability of your organization.